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Income Tax Appellate Tribunal, DELHI BENCHES ‘E’, NEW DELHI
Before: Sh. Bhavnesh SainiDr. B. R. R. Kumar
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES ‘E’, NEW DELHI Before Sh. Bhavnesh Saini, Judicial Member Dr. B. R. R. Kumar, Accountant Member ITA No. 5053/Del/2013 : Asstt. Year : 2009-10 Deputy Commissioner of Vs M/s Minda Corporation Ltd., Income Tax, Central Circle-03, 36A, Rajasthan Udog Nagar, New Delhi-110055 Delhi-110033 (APPELLANT) (RESPONDENT) PAN No. AAACM0344C Assessee by : Sh. Somil Aggarwal, Adv. Revenue by : Ms. Rinku Singh, Sr. DR Date of Hearing: 10.07.2019 Date of Pronouncement: 11.07.2019 ORDER Per Dr. B. R. R. Kumar, Accountant Member:
The present appeal has been filed by the Revenue against the order of the Ld. CIT(A)-IX, New Delhi dated 10.06.2013.
The assessee has raised the following grounds: “1. That the Commi ssi oner of Income T ax (Appeal s) erred in law and on facts of the case in del eting the additi on of Rs. 39, 42, 659/- made by the Assessi ng Officer on account of di sall owance of commi ssi on paid to Minda Europe B.V. Netherlands. 2. T hat the Commi ssioner of I ncome T ax (Appeal) erred i n law and on facts in del eting the additi on of Rs. 18, 29,678/- made by the Assessi ng Offi cer on account of di sallowance of w arranty provisi on. 3. T hat the Commissi oner of I ncome T ax(Appeals) erred in law and on facts in deleti ng the addition of Rs. 8, 50, 720/- made by the Assessing Offi cer on account of di sallowance u/s 14A. 4. T hat the Commissioner of Income Tax (Appeals) erred in law and on facts in deleting the addition of RS. 54, 212/- made by the Assessi ng Offi cer on account of di sallowance of depreciation on pri nter. ”
ITA No. 5053/Del/2013 2 Minda Corporation Ltd.
Ground No. 1 pertains to commission paid of Rs.39,42,659/- to Minda Europe B.V. Netherlands for procuring sales abroad @ 3%. On perusal of the agreement which reveals that a) Minda Europe B. V. Netherlands is a subsidiary company to Minda Corporation Limited. b) It is engaged in the business of relationship management particularly new customer development, new business with the existing customer, getting request for queries (RFQ), price negotiation, getting approval from customers and settling issues with customers in European market exclusively. It takes care of European market plans, marketing programs, quality and customer satisfaction surveys, guidelines of European marketing and branding policies etc. c) The assessee has cited certain case laws and CBDT Circular stating that - "as Minda Europe B.V. Netherlands is working as an agent of the assessee company in the European market, hence TDS is not applicable and the claim of the assessee is justified." The Assessing Officer has drawn inferences detailed below while making the addition.
Based on the agreement, the AO has made addition taking cue on the following: “1. A perusal of the services li sted above, being provi ded by Minda Europe B. V. Netherl ands clearly shows that these are i n the nature of techni cal, manag erial & consultancy services as per the provi sions of Secti on 9(1)(vii)(b) Ex planati on-2 of the I.T. Act.. The servi ces rendered by the company are not merely procuring sales for the assessee rather they are in nature of technical, manag erial and consultancy services. 2. T he expenditure i s li able to be disall owed as per the provisi ons of section 40(a)(i) of the I.T . Act, 1961, as this amount is covered under the provi sions of secti on 195(1) r.w. s. 9(1)(vii)(b) Ex planati on -2 of the I.T. Act. As no TDS has been deducted on this amount, it is not to be deducted in computing /the income chargeable under the head "Profit and g ains of the Busi ness and Professi on". [Section 40(a)(i)]
ITA No. 5053/Del/2013 3 Minda Corporation Ltd.
Reli ance is al so pl aced on the following case law s: 3.1 in the decisi on of Continental Construction Ltd Vs. CIT 1992 195 ITR 81 (SC), it has been broug ht out that - the expression 'technical servi ces' has a very broad connotation and it has been used elsew here in the statue al so so widely as to comprehend 'professi onal servi ces’. 3.2 From the combi ned reading of clause (vii )(b) of the section 9(1) and Explanati on 2 it becomes clear that any considerati on, w hether lump sum or otherwise, paid by a person, who is a resident in I ndia, to a non resi dent for runni ng any managerial or techni cal or consultancy service, w ould be income by way of fees for technical servi ces and w ould therefore, be withi n in the ambit of "income deemed to accrue or arise i n I ndia" - G.V. K. Industries Ltd V ITO [1997] 228 ITR 564 (AP).” 5. Aggrieved the assessee went before the ld. Commissioner of Income Tax (Appeals) who has deleted the addition on the grounds that the Assessing Officer has not determined whether such payment is subjected to tax and subsequently whether the tax is deductible at source under Chapter XVIIB. The ld. CIT(A) held that in view of the Board Circular, the assessee was under no compulsion to deduct tax as the commission earned by the non-resident for acting as the selling agent for the Indian exporter, and the non-resident was rendering services from outside India and does not accrue in India. It was held that since the assessee is not taxable in India, the provisions relating to TDS are not applicable.
Before us, the ld. Authorized Representative relied on the assessment order whereas the ld. Departmental Representative on the order of the ld. CIT(A).
We find that this matter has already been adjudicated by the Co-ordinate bench of ITAT Delhi in favour of the assessee for the assessment years 2007-08 and 2008-09. For the sake of ready reference, the relevant part of the ITAT order is reproduced as under:
ITA No. 5053/Del/2013 4 Minda Corporation Ltd. “3. I nasmuch as the Ld. CIT(A) confirmed these tw o additions i n appeal, assessee is before us i n thi s second appeal challenging the confi rmation on the ground that the Ld. CIT(A) erred i n upholding the disall owance of commi ssi on by i nv oking the provi sions under section 40(a)(i) of the Act and according to the assessee the commissi on paid by the assessee was not i n the nature of ‘Fee for Technical Services’ (FTS) liable to tax in India under secti on 9(1)(vii)(b) of the Act for non- sati sfacti on of the ‘make av ailable’ clause. It is further contended that the authorities below failed to appreciate the fact that thi s amount of Rs. 78, 207/-was an all owable deduction under secti on 36(1)(vii) of the Act read with secti on 36 (2) of the Act. 4. Ld. AR, however, at the time of arguments not pressed ground No. 2 and proceeded to arg ue ground No. 1 on the above lines. W hat, therefore, effectively fall s for our consideration i n this appeal is the issue rel ating to the disallow ance of commissi on paid by the assessee to Minda Europe BV Ld. AR submitted that as per the terms of the agreement between the assessee and the Mi nda Europe BV, Netherlands, the Minda Europe BV was responsible for carrying out presale activiti es and post sale activities on behal f of the assessee and appointed as an agent for assi sting the assessee in identi fying the prospective customers and affecting sales outside I ndia i n the European mark et ex clusively for w hi ch they are entitled to receive the commission at 3% on export sal es. He, therefore, submits that under section 195 of the Act, an obligati on i s cast on a person making payment to a non-resident of any sum, which is chargeable under the provi sions of the Act, to deduct tax at the rates i n force, at the time of payment of such sum or at the time of credit thereof to the account of the Payee, whi chever i s earlier and in view of the deci sion of the Hon’ble Supreme Court in the case of GE I ndia technol ogy Centre (P) Ltd v s. Ld. CIT(A) 327 IT R 456 only if the income is chargeable to tax in India in the hands of the non-resident recipients, then only the tax would be required to be deducted at source for such pay ments. Placing reliance on the deci sion of the Hon’ble Apex court in the case of Ld. CIT(A) vs. Toshok u Ltd., 125 ITR 525 and of the Hon’ble juri sdicti onal High Court i n the cases of Ld. CIT(A) v s. Eon Technology priv ate li mited 343 IT R 366 (del), DIT vs. Panal fa Autolectrik Ltd 227 taxman 371 (Del) and CIT vs. Angelique international Ltd., 359 IT R 9 (Del) and Arti cle 12(5)(b) of the DTAA between I ndia and Netherl ands, he submitted that the commission paid to the foreig n enti ty does not constitute the ‘Fee for Techni cal Services’ (FTS) and i s not l iable to be brought to tax in I ndia. 6. W e have g one throug h the record. It could be seen from the assessment order that on a perusal of the agreement and details submitted by the assessee, learned assessi ng offi cer found that the Minda Europe BV i s a subsi diary company of the assessee and has been engaged in the business of rel ationship management parti cularly to customer devel opment, new busi ness with their existi ng customer, getting request for queries (RFQ ), Price neg otiati on, getti ng approv al from customers and settling issues with customers in European market exclusively ; and that it tak es care of European market plans, marketi ng prog rams, quality and customer satisfacti on survey s, gui delines of European marketing and branding policies etc. 7. Accordi ng to the assessee Minda Europe BV is worki ng as an agent of the assessee company in the European market, and therefore T DS i s not applicable and the clai m of the assessee is justifi ed. Learned AO recorded that the abov e servi ces are i n the nature of technical, manag erial and consultancy servi ces as per the provisi ons of section 9(1)(vii) (b) of the Act Explanati on-2 of the Act and are not merely procuring sales for the assessee, rather they are i n the nature of techni cal, managerial and consultancy servi ces. On thi s premi se learned
ITA No. 5053/Del/2013 5 Minda Corporation Ltd. AO held that the expenditure has to be di sall owed as per the provisi ons of secti on 40(a)(i) of the Act as thi s amount is covered under the provi sions of secti on 195 (1) read with secti on 9(1)(vii)(b) of the Act Explanati on 2. 8. Learned council placed reliance on the decisi on of the Hon’ble Apex Court in the case of CIT v s. T oshoku Ltd 125 I TR 525 i n support of their contention that the commi ssi on earned by a non-resident ag ent outside India cannot be said to be the i ncome accrui ng or arisi ng or deemed to accrue or arise in Indi a i n terms of secti on 9 (1) (i) of the Act. I n that case, the assessee was a non-resident company. It was appointed as an exclusive sales agent i n Japan for selling tobacco exported by a dealer in I ndia for whi ch the non-resident company was to get a commi ssi on of 3% on the inv oi ce amount. Entire sal e considerati on w as received i n India and subsequently by maki ng credit entri es i n the book s of account in India i n respect of the commission pay able to the non-resident agent, the commi ssi on was remitted to the non-resident. The i ssue that had arisen for consideration w as w hether the commi ssi on received by the non-resident was chargeable to tax i n I ndia. Hon’ble Apex Court held that the commission amounts w ere remitted to the non-resident outside India and merely because a credit entry was made to their account i n the books of the dealer in I ndi a, the same could not be said to be receiv ed or deemed to be received in India in terms of secti on 5 (2) (a) of the Act, since services were rendered by the non-resident agent outside I ndia, the commi ssi on earned there could not be said to be income accrui ng or arisi ng or deemed to accrue or arise i n I ndia i n terms of secti on 9(1)(i) of the Act. 9. This deci sion of the Hon’ble Apex court in the case of Toshok u (supra) was followed by the Hon’ble juri sdi ctional High Court in the case of CIT vs. Eon Technolog y Private Limited, 343 IT R 366 (Del hi) i n which al so si milar facts were i nv olved. T he Hon’ble juri sdi ctional Hig h Court w hile referring to the CBDT ci rcular nos. 23 and 786 dated 23/7/1969 and 7/2/2000 respectively, upheld the orders of the Ld. CIT(A) and the Tribunal del eted the expenditure under section 40(a)(ia) of the Act. 10. In the case of DIT v. Panalf Autolectrik Ltd 227 Tax man 371 (Del) also the Hon’ble juri sdictional Hig h Court held that the commi ssi on paid for arrangi ng export sal es and reali sing payments to a non-resident company not constitute the payments for rendering managerial, consultancy or techni cal servi ces i n terms of section 9(1)(vii) (b) of the Act. The very same propositi on has been rendered by the Hon’ble juri sdictional Hig h Court in the case of CIT v s. Ang elique internati onal Ltd 379 ITR 9 (Del). 11. It is, therefore, clear from the above line of judi cial pronouncements that any commissi on paid to the ag ent outside I ndia for the services rendered outside Indi a do not constitute the ‘Fee for Techni cal Servi ces’ (FTS) within the meaning of secti on 9(1)(vii) of the Act. 12. Now turni ng to the ‘make available’ clause, the i ssue in this matter is cov ered by the DTAA betw een India and Netherl ands. We have g one throug h the provi sions of the double taxation avoidance ag reement of India with Netherlands. Article 7 (6) thereof reads that w here profits incl ude items of i ncome w hich are dealt with separately in articl es of this convention, then the provisi ons of those arti cles shall not be affected by the provisi ons of this Arti cle; and that Article 5 (7) read that the fact that a company whi ch i s a resi dent of one of the states controls or i s controlled by a company whi ch i s a resident of other state, or w hi ch carries on business in that other state (w hether through a permanent establishment or otherwise), shall not of itsel f constitute
ITA No. 5053/Del/2013 6 Minda Corporation Ltd. either company a permanent establishment or the other. Article 12 thereof deals with roy alties and fees for techni cal servi ces. Arti cle 12 (1) says that royalties and fees for technical servi ces arisi ng i n contracti ng state and pai d to a resident of the other contracti ng state may be taxed in that other state, whereas sub arti cle (5) says that for the purpose of thi s arti cle ‘Fee for Technical Services’ means pay ments of any kind to any person i n considerati on for the rendering of any techni cal or consultancy servi ces (i ncl udi ng through the provisi on of servi ces of technical or other personnel) if such servi ces: (a) are ancillary and subsidiary to the application for enjoy ment of the rig hts, property, or information for w hich a pay ment described in paragraph 4 of this article is received; or (b) ‘make avail able’ techni cal knowledge, experience, skill know-how or processes, and consist of the development and transfer of a technical pl an or a technical desig n. 13. T he questi on of appli cability of Arti cle 12(5)(b) of the DTAA to a situation like thi s, where ‘make av ailable’ cl ause i s there and has been consi dered by the Hon’bl e jurisdi cti onal Hig h Court i n the case of DIT vs. Guy Carpenter and company li mited 346 I TR 504 (Del hi) i n the lig ht of article 13 (4) (c) of the DTAA between I ndia and United Ki ngdom which is in pari materia with the article 12(5)(b) of the DTAA between India and Netherlands, and the Hon’ble juri sdicti onal High Court held that, - A plai n reading of Arti cle 13(4)(c) of the DT AA i ndicates that 'fees for techni cal servi ces' w oul d mean payments of any kind to any person in considerati on for the renderi ng of any technical or consultancy servi ces whi ch, inter ali a, "mak es availabl e" techni cal knowledge, experience, skill, know-how or processes, or consi st of the devel opment and transfer of a technical plan or techni cal desi gn. According to the Tribunal thi s "make avail able" conditi on has not been satisfied inasmuch as no techni cal k nowl edge, experience, skill, know -how, processes, have been made av ail able by the assessee to the insurance compani es operating in Indi a. It also does not consi st of the development and transfer of any techni cal plan or technical desig n. 14. ‘M ake av ailable’ clause in Arti cle 12(5)(b) of the DTAA between India and Netherlands w as considered by the Hon’ble Karnatak a Hig h Court in the case of C.I.T. Vs. De Beers India Mineral s Private Li mited 346 IT R 467 (Karnataka) and Hon’ble court held that Articl e 12(5) of the DT AA defi nes “fees for techni cal services” to mean pay ments in consi deration for the renderi ng of any techni cal or consultancy servi ces “whi ch make av ailable technical knowledge, experience, etc or consist of the development and transfer of a techni cal pIan or techni cal design. To be said to “make availabl e”, the servi ce shoul d be aimed at and result in transmitti ng techni cal k nowledge etc so that the payer of the servi ce could derive an enduri ng benefit and utilize the knowledge or know -how on hi s own in future without the ai d of the service provider. In other w ords, to fit into terminology “maki ng avail able”, the technical knowledge, skills” etc must remai n with the person receiving the service even after the parti cul ar contract comes to an end. It is not enoug h that the services offered are the product of i ntense technol ogi cal effort and a lot of technical knowledg e and experience of the service provider has g one into it. The technical k nowl edge or skills of the provider shoul d be i mparted to and absorbed by the receiver so that the receiver can deploy similar technol ogy or techniques in the future without depending upon the provider. On facts, w hile the Dutch company performed the survey s usi ng substanti al technical skills, it has not made availabl e the technical ex perti se i n respect of such collecti on or processi ng of data to the assessees, whi ch the assessee can apply independently and without assistance and undertake such survey
ITA No. 5053/Del/2013 7 Minda Corporation Ltd. independently. Consequently, the consideration is not assessable as “fees for techni cal services”. 15. When we appreciate the facts inv olved in the case on hand, it is clear that the services rendered by the foreig n agent in thi s matter are in the nature of performi ng their job abroad. They are more akin to the servi ces of an ag ent receiving commission, but there does not ari se any question of imparti ng any techni cal know-how or knowledge or skills to the Indian entity . With this view of the matter, we concl ude that the impug ned pay ment does not satisfy the tests of, firstly, for the servi ces which are ancillary and subsidi ary to the applicati on for enjoy ment of any ri ght, property or information under Arti cle 12(5)(a) of the DTAA, and secondly, the ‘make available’ cl ause within the meaning of Article 12(5)(b) of the DTAA betw een I ndia and Netherl ands. We accordingly hold that the pay ment in questi on does not fall within the scope and ambit of Article 12 of the DTAA betw een India and Netherlands. It foll ows that inasmuch as there i s no permanent establishment for the servi ces rendered i n India, the recei pts are not taxable under Arti cle 7 also. Issue i s answered accordingly i n fav our the assessee and the learned Assessing Officer is directed to delete the addition of Rs.27, 28, 045/-made on account of the di sall owance of commission paid by the assessee to Minda Europe BV. ” 8. Since, the matter stands adjudicated for earlier years and in the absence of any material changes in the facts of the case, we hereby decline to interfere with the order of the ld. CIT(A).
The Second addition pertains to warranty charges of Rs.18,29,678/- which was adjudicated by the Co-ordinate Bench of ITAT in assessee’s own case for the assessment year 2001-02 in ITA No. 3560/Del/2004 dated 28.07.2006. Similarly, for the assessment year 2005-06 in assessee’s own case in ITA No. 4705/Del/2009, the addition made by the assessee is deleted.
We find that the Hon’ble Supreme Court has settled the controversy of the claim of warrant expenses while delivering judgment in the case of Rotork Control India Pvt. Ltd. Vs CIT (2009) 314 ITR 62 (SC). The Hon’ble Court has held as under: “For determining an appropriate histori cal trend, it is important that the company has a proper accounting system for capturi ng relati onship between the nature of the sales, the w arranty provi sions made and the actual expenses incurred ag ainst it subsequently. T hus, the decisi on on the w arranty provi sion shoul d be based on past experience of the company. A detailed assessment of the warranty provisi oni ng poli cy i s requi red, particularly if the experience suggests that warranty provi sions are generally reversed i f they remain unutilized at the end of the peri od prescribed in the warranty. Therefore, the company should
ITA No. 5053/Del/2013 8 Minda Corporation Ltd. scruti nize the hi storical trend of warranty provi sions made and the actual ex penses incurred ag ainst it. O n thi s basi s, a sensibl e estimate shoul d be made. T he warranty provi sion for the products should be based on the estimate at the yearend of future warranty expenses. Such esti mates need reassessment every year. As one reaches close to the end of the warranty peri od, the probability that the w arranty ex penses will be incurred is considerably reduced and that should be reflected in the estimation made. Whether thi s should be done through a pro rata reversal or otherwi se w ould require assessment of histori cal trend. If warranty provi si ons are based on experi ence and histori cal trend(s) and If the w orki ng is robust, then the question of reversal in the subsequent two years, in the above example, may not arise in a sig nifi cant w ay. Hence, on the facts and circumstances of the instant case, provi sion for warranty w as rig htly made by the assessee because it had incurred a present oblig ati on as a result of past events. There was al so an outfl ow of resources. A reliable estimate of the obligation was also possible. Therefore, the assessee had incurred a liability duri ng the relevant assessment y ears and it was entitled to deduction under secti on 37. Therefore, all the three conditions for recognizi ng a liability for the purpose of provi sioning stood sati sfied in the instant case. T here are four important aspects of provisi oni ng, vi z., provi sioning which relates to present obligati on; it ari ses out of obligating events; it i nvolv es outfl ow of resources; and lastly, it inv olves reliable estimation of an obligati on. Keepi ng in mi nd all the four aspects, the Hig h Court should not to have interfered with the deci sion of the Tribunal in the instant case. From analy sis of the various deci sion of the Supreme Court, in w hich a similar issue w as decided, the principle w hi ch emerges i s that if the histori cal trend indicates that a large number of sophi sticated g oods were being manufactured in the past and i f the facts established show that defects existed in some of the items manufactured and sold, then the provi sion made for warranty in respect sophi sticated goods w ould be entitled to deducti on from T he gross receipts under secti on 37. It would all depend on the data systemati cally mai ntai ned by the assessee.” 11. Since, the judgment of the Hon’ble Supreme Court is squarely applicable to the assessee company and keeping in view the fact that the ld. CIT(A) has given relief based on the Hon’ble Supreme Court judgment. We hereby decline to interfere with the order of the ld. CIT(A) on this ground decline to interfere in the order of the ld. CIT(A).
Ground No. 3 pertains to disallowance u/s 14A of the Act of Rs.8,50,720/-.
We find from the record that the assessee has not claimed any exempt income. Hence, in the absence of any exempt
ITA No. 5053/Del/2013 9 Minda Corporation Ltd. income, no disallowance of amount u/s 14A of the Act is called for. Hence, we direct the disallowance made be deleted.
Ground No. 4 pertains to disallowance on account of depreciation on printer.
The Assessing Officer treated the printers as general plant & machinery and allowed the depreciation at the rate of applicable to plant & machinery which is 15% whereas the printers are considered as part of the computer equipments by the Hon’ble High Court of Delhi in the case of BSES Rajdhani Power Ltd. wherein depreciation of 60% is allowed. Hence, keeping in view, the factual contents and the orders of the Hon’ble High Court, we hereby hold that the depreciation @ 60% be allowed to the printers which is a part of composite unit of computer.
In the result, the appeal is dismissed. (Order pronounced in the open Court on 11.07.2019)
Sd/- Sd/- (Bhavnesh Saini) (Dr. B. R. R. Kumar) Judicial Member Accountant Member Dated: 11/07/2019 *Subodh* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR